The effectiveness of investment in lead time reduction for a make-to-stock product

This paper focuses on a firm selling a make-to-stock product with a constant customer demand rate. The firm follows an exact (Q, r) policy for raw material inventory control and faces a random replenishment lead time. Through this research, we wish to gain a better understanding of the impact of investing in reducing supply lead time when the investment costs have to be borne, partly or fully, by the firm. This work is motivated by the recognition that lead time reduction is now of strategic importance in the successful operation of a firm. We examine different types of investment schemes in replenishment lead time reduction and the different cost models they generate. We present analytical and numerical results and insights for each type of model, compute the optimal ( Q, r) policy and the associated investment levels. The work presents new results, and sheds light on some apparently counter-intuitive observations.